Accrued expenses are expenses that have occurred but are not yet recorded through the normal processing of transactions. Since these expenses are not yet in the accountant's general ledger, they will not appear on the financial statements unless an adjusting entry is entered prior to the preparation of the financial statements.
Here is an example. A company borrowed $200,000 on December 1. The agreement requires that the $200,000 be repaid on February 28 along with $6,000 of interest for the three months of December through February. As of December 31 the company will not have an invoice or payment for the interest that the company is incurring. (The reason is that all of the interest will be due on February 28.)
Without an adjusting entry to accrue the interest expense that the company has incurred in December, the company's financial statements as of December 31 will not be reporting the $2,000 of interest (one-third of the $6,000) that the company has incurred in December. In order for the financial statements to be correct on the accrual basis of accounting, the accountant needs to record an adjusting entry dated as of December 31. The adjusting entry will consist of a debit of $2,000 to Interest Expense (an income statement account) and a credit of $2,000 to Interest Payable (a balance sheet account).
Accrued liabilities are usually expenses that have been incurred by a company as of the end of an accounting period, but the amounts have not yet been paid or recorded in Accounts Payable. The accrued liabilities and their related expenses are recorded as of the end of the accounting period through the use of adjusting entries.
Some examples of accrued liabilities include accrued wages, accrued fringe benefits, accrued management bonuses, accrued advertising and promotion, accrued product warranty costs, and accrued interest on loans payable.
Accrued expenses are reported in the current liabilities section of the balance sheet. Accrued expenses reported as current liabilities are the expenses that a company has incurred as of the balance sheet date, but have not yet been recorded or paid. Typical accrued expenses include wages, interest, utilities, repairs, bonuses, and taxes.
Accrued revenues are reported in the current assets section of the balance sheet. The accrued revenues reported on the balance sheet are the amounts earned by the company as of the balance sheet date that have not yet been recorded and the customers have not yet paid the company.
Accrued expenses and accrued revenues are also reflected in the income statement and in the statement of cash flows prepared under the indirect method. However, these financial statements reflect a time period instead of a point in time.
Accrued rent could be the rent that a landlord has earned but has not been received from the tenant. Under the accrual method of accounting this would be reported by the landlord on the income statement as Rent Revenue or Accrued Rent Revenue and on the balance sheet as the asset Rent Receivable.
Accrued rent could also refer to the rent expense that the tenant has incurred but has not yet paid the landlord. Under the accrual method of accounting the tenant would report the accrued rent as Rent Expense on its income statement and on its balance sheet as the liability Accrued Expenses or Rent Payable.
If the rent is to be paid at the beginning of each month, there would be accrued rent only if the tenant fails to pay the rent when it was due.
The differences between an unadjusted trial balance and an adjusted trial balance are the amounts recorded as part of the adjusting entries.
Adjusting entries include the accrual of revenues that were earned but were not yet recorded, and the accrual of expenses that were incurred but were not yet recorded. Accrued expenses and the related liabilities often involve wages, utilities, repairs and maintenance, commissions, interest, and more.
Adjusting entries also include depreciation and the deferral of or an adjustment of prepayments including prepaid insurance, unearned revenues, customer deposits, and more.
I would use the liability account Accounts Payable for suppliers' invoices that have been received and must be paid. As a result, the balance in Accounts Payable is likely to be a precise amount that agrees with supporting documents such as invoices, agreements, etc.
I would use the liability account Accrued Expenses Payable for the accrual type adjusting entries made at the end of the accounting period for items such as utilities, interest, wages, and so on. The balance in the Accrued Expenses Payable should be the total of the expenses that were incurred as of the date of the balance sheet, but were not entered into the accounts because an invoice has not been received or the payroll for the hourly wages has not yet been processed, etc. The amounts recorded in Accrued Expenses Payable will often be estimated amounts supported by logical calculations.
Accrued income is reported as a current asset such as accrued receivables, accrued revenues, or part of accounts receivable.
The amount of the accrued income will also increase the corporation's retained earnings. This occurs because the accrual adjusting entry included a credit to a revenue account—thereby increasing the corporation's net income.